TaxTMI 
TaxTMI 
2017 (11) TMI 1814
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....th September, 2014. Clause III.20.1 thereof provides for the resolution of the disputes between the parties through arbitration and the same is quoted herein below:- "III.20 ARBITRATION "III.20.1 In the event of any question, dispute or difference arising under the agreement or in connection there-with (except as to the matters, the decision to which is specifically provided under this agreement), the same shall be referred to the sole arbitration of the CMD, BBNL or in case his designation is changed or his office is abolished, then in such cases to the sole arbitration of the officer for the time being entrusted (whether in addition to his own duties or otherwise) with the functions of the CMD, BBNL or by whatever designation such an officer may be called (hereinafter referred to as the said officer), and if the CMD or the said officer is unable or willing to act as such, then to the sole arbitration of some other person appointed by the CMD or the said officer. The agreement to appoint an arbitrator will be in accordance with the Arbitration and Conciliation Act 1996. There will be no object to any such appointment on the ground that the arbitrator is a Government Servant or....
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.... If there is a clause requiring the parties to nominate their respective arbitrator, their authority to nominate cannot be questioned. What really in that circumstance can be called in question is the procedural compliance and the eligibility of their arbitrator depending upon the norms provided under the Act and the Schedules appended thereto. But, here is a case where the Managing Director is the "named sole arbitrator" and he has also been conferred with the power to nominate one who can be the arbitrator in his place. Thus, there is subtle distinction". xxxx xxxxx "57. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contain....
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....become de jure incapable of acting as an Arbitrator since the very date of his appointment; c) this Hon'ble Court may appoint a new Sole Arbitrator, who may preferably be a retired Hon'ble Judge of this High Court as stakes are high and substantial issues of law are involved; d) this Hon ble Court may further pass such other and further orders as is deemed fit and proper in the facts and circumstances of the case." 7. The respondent, who appeared on advance notice, has also been heard. He waived his right to file a reply to the petitions. 8. Relying on the above referred judgment in TRF Ltd. (supra), the counsel for the petitioner submits that the appointment of the Sole Arbitrator was void ab initio and in terms of Section 14(1)(a) of the Act, the arbitrator had become de jure ineligible to perform his functions as an arbitrator and had to be substituted by this Court by another arbitrator. 9. Section 12(5) and Section 14(1) of the Act are quoted herein below:- "12. Grounds for challenge - xxxxx (5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any o....
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....the judgment of Karnataka High Court in Rail India Technical. and Economic Services Ltd. vs. Ravi Constructions and Anr. 2002 (1) Karnataka LJ 419, to submit that the petitioner having submitted to arbitration not only waived its right to object to such appointment but is estopped from challenging the validity of the appointment. 11. I have considered the rival submissions made by the counsel for the parties. 12. It is no doubt correct that the Supreme Court in the judgment in TRF Ltd. (supra) has clearly held that if any person falls under any of the categories specified in the Seventh Schedule, not only he shall be ineligible to be appointed as an arbitrator in view of Section 12(5) of the Act, even his nominee would also suffer from such ineligibility. But what is to be considered is whether the plea of such ineligibility can be taken by a party who appoints such arbitrator. 13. In the case of Voestalpine Schienen GMBH v. Delhi Metro Rail Corpn. Ltd. (2017) 4 SCC 665, Supreme Court analyzed the object of introduction of Section 12(5) of the Act in the following words:- "15. It is a well-known fact that the Arbitration and Conciliation Act, 1996 was enacted to consolidate an....
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.... "circumstances" which give rise to "justifiable doubts", and it is clear that there can be many such circumstances and situations. The test is not whether, given the circumstances, there is any-actual-bias for that is setting the bar too high; but, whether the circumstances in question give rise to any- justifiable apprehensions-of bias. 56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (See Executive Engineer, Irrigation Division v.Gangaram Chhapolia, (1984) 3 SCC 627, Transport Deptt. v. Munuswamy Mudaliar 1988 Supp SCC 651, International Airports Authority v. K.D. Bali (1988) 2 SCC 360, S. Rajan v. State of Kerala (1992) 3 SCC 608, Indian Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics Gem Mfg. Co. Ltd. (1996) 1 SCC 54, Union of India v. M.P. Gupta (2004) 10 SCC 504 and ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd. (2007) 5 SCC 304 that arbitration agreements in government contracts which provide for arbitration b....
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....n adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous - and the right to natural justice cannot be said to have been waived only on the basis of a "prior" agreement between the parties at the time of the contract and before arising of the disputes. 58. Large-scale amendments have been suggested to address this fundamental issue of neutrality of arbitrators, which the Commission believes is critical to the functioning of the arbitration process in India. In particular, amendments have been proposed to Sections 11, 12 and 14 of the Act. 59. The Commission has proposed the requirement of having specific disclosures by the arbitrator, at the stage of his-possible-appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Commission has proposed the incorporation of the Fourth Schedule, which has drawn from the red and orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, and which would be treated as a "guide" to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand,....
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....international arbitration, neutrality is generally related to the nationality of the arbitrator. In international sphere, the "appearance of neutrality" is considered equally important, which means that an arbitrator is neutral if his nationality is different from that of the parties. However, that is not the aspect which is being considered and the term "neutrality" used is relatable to impartiality and independence of the arbitrators, without any bias towards any of the parties. In fact, the term "neutrality of arbitrators" is commonly used in this context as well. 18. Keeping in mind the aforequoted recommendation of the Law Commission, with which spirit, Section 12 has been amended by the Amendment Act, 2015, it is manifest that the main purpose for amending the provision was to provide for neutrality of arbitrators. In order to achieve this, sub-section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject-matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator. In such an eventual....
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.... may be, and it is one of the essential qualities of an arbitrator." 22. Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings. 23. It also cannot be denied that the Seventh Schedule is based on IBA guidelines which are clearly regarded as a representation of international based practices and are based on statutes, case law and juristic opinion from a cross-section on jurisdiction. It is so mentioned in the guidelines itself. xxxxxx xxxxx 25. Section 12 has been amended with the objective to induce neutrality of arbitrators viz. their independence and impartiality. The amended provision is enacted to identify the "circumstances" which give rise to "justifiable doubts" about the independence or impartiality of t....
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....on obstante clause. It categorically lays down that if a person whose relationship with the parties or the counsel or the subject-matter of dispute falls under any of the categories specified in the Seventh Schedule, shall be ineligible to be appointed as an arbitrator. There is a qualifier which indicates that parties may, subsequent to the disputes arisen between them, waive the applicability by express agreement in writing. The qualifier finds place in the proviso appended to sub-section (5) of Section 12. On a careful scrutiny of the proviso, it is discernible that there are fundamentally three components, namely, the parties can waive the applicability of the sub-section; the said waiver can only take place subsequent to dispute having arisen between the parties, and such waiver must be by an express agreement in writing." 15. In the present case, in my opinion the three conditions that have been laid down by the Supreme Court in TRF Ltd. (supra) were fulfilled. The petitioner, knowing fully well that the arbitrator suffered from an ineligibility in terms of Section 12(5) of the Act proceeded to nominate him as a Sole Arbitrator after the disputes had arisen between the parti....
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....st of doing business would increase. It takes time to implement such formalities. What is even more worrisome is that the parties' intention to arbitrate would be foiled by formality. Such a stance would run counter to the very idea of arbitration, wherein tribunals all over the world generally bend over backwards to ensure that the parties' intention to arbitrate is upheld. Adding technicalities disturb the parties' 'autonomy of the will' (l' autonomie de la volonte') i.e. their wishes. (For a general discussion on this doctrine see Law and Practice of International Commercial Arbitration, Alan Redfern and Martin Hunter, Street & Maxwell, London, 1986 at pp.4 and 53) 60) Technicalities like stamps, seals and even signatures are red tape that have to be removed before the parties can get what they really want-an efficient, effective and potentially cheap resolution of their dispute. The autonomie de la volonte' doctrine is enshrined in the policy objectives of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International commercial Arbitration, 1985, on which our Arbitration Act is based.(see Preamble to the Act) The courts must implement legislat....